With the stock market becoming increasingly accessible to retail investors, more and more people are looking for effective ways to make money in stocks. Building a complete investing system is crucial for long-term success in the stock market. A good investing system provides a strategic framework, guiding principles and concrete tactics to help investors identify good stocks, manage risks, and generate sustainable profits. This article will explore key components of a complete investing system for stock market investing, drawing insights from investment classics like William O’Neil’s CAN SLIM system, Philip Fisher’s investment principles, and modern value investing strategies.
Set clear investment goals and risk tolerance
The foundation of any investing system is having clear investment goals and risk tolerance benchmarks. Goals determine the expected return and timeframe, while risk tolerance sets limits on the maximum downside accepted. Conservative investors may target 8-10% annual returns over 5-10 years and accept max 15% portfolio loss, while aggressive investors seek >15% returns over decades and tolerate >30% temporary loss. Knowing goals and risk tolerance ensures investors select suitable stocks and portfolio strategies.
Develop robust stock selection criteria
Core of an investing system is stock selection criteria that surface good stocks with growth potential. Useful criteria include strong earnings growth, rising profit margins, solid management and competitive advantage. O’Neil’s CAN SLIM system uses earnings growth, new products and leadership position to find winning stocks. Philip Fisher favored innovative companies with skilled management and promising growth prospects. Value investors like Warren Buffett target undervalued stocks with strong fundamentals. Developing and backtesting sound stock selection principles is vital for stock-picking success.
Have a disciplined buy and sell strategy
An investing system needs to dictate exactly when to buy and sell stocks based on price and fundamentals. Tactical investors like William O’Neil advocate buying leading stocks breaking out from proper bases to benefit from uptrends. Philip Fisher held onto quality growth stocks for long term through temporary declines. Value investors acquire undervalued stocks and sell when prices reach intrinsic value estimates. Having a rules-based approach to buy low, sell high prevents emotional decisions and anchors the investing process.
Manage risks through diversification and position sizing
Mitigating risks is key for sustaining profits in stocks. Diversifying across 10-30 stocks from different sectors reduces stock-specific risks. Limiting position sizes to 1-5% of portfolio value also contains the downside from any single holding. Additionally, setting stop losses at 8-10% below purchase price locks in profits and cuts losses. Avoiding overexposure to speculative stocks maintains an appropriate risk profile for the portfolio.
Keep updated on company and industry developments
Staying updated on portfolio stocks and their operating environment is essential for timely buy and sell decisions. Earnings reports reveal the company’s financial health and outlook. Conference calls and management interviews provide clues to strategic direction. Tracking competitive dynamics and industry trends spot risks and opportunities early. Blocking out the market’s short-term noise and focusing on long-term fundamentals leads to rational investing actions.
In summary, building a complete investing system is key to making money in stocks sustainably. It involves defining investment goals, developing stock selection criteria, having buy and sell rules, managing risks, and keeping updated on portfolio stocks. A prudent investing system aligned with personal goals and risk appetite can help investors outperform the market over the long run.